The Great Overdraft Sting

While debate rages about unfair penalty charges on overdrafts, we exclusively reveal another con: the sky-high interest rates that we pay!

If you slip a few pounds overdrawn (either accidentally, or on purpose), or exceed your overdraft limit/buffer by even a small sum, then you're in a world of pain. The first bit of bad news is that your bank will rejoice as it hits you with unbelievably high penalties for breaching your existing borrowing arrangement. For example, Halifax charges £39 if a borrower exceeds his/her overdraft limit, even by as little as £1. Ouch!

However, I'm not going to discuss these punitive fines in detail today, as we've examined them at length in this and many previous articles. My beef today is with the second, but less obvious, rip-off which comes with current account overdrafts: the extortionate interest rates which banks and building societies levy on unauthorised overdrafts.

As you probably know, the Bank of England's base rate presently stands at 5.75%. In other words, big banks can borrow from the 'Old Lady of Threadneedle Street' and pay 5.75% a year for the privilege. Thus, by lending money to businesses and individuals at rates higher than this, lenders can make a tidy profit, even after taking bad debts into account.

However, my complaint is simple: as well as punishing unauthorised borrowing with penalty charges, providers of current accounts also charge excessive rates of interest on these debts. In order to back up my argument, I trawled through the unauthorised overdraft rates charged by all of the UK's current-account providers, courtesy of the August issue of Moneyfacts magazine. Here's what I found:

The Good: unauthorised overdraft rates of 10% EAR or below

('EAR' is short for 'Equivalent Annual Rate')

As you can see, A&L almost sweeps the board in this category, with three entries in the top four. However, it's worth noting that its Premier 21 account is aimed at young people and, therefore, age restrictions apply.

The Coventry BS First account charges no interest on unapproved overdrafts of up to £1,000, making it the winner in this category. Runner-up is the ever-popular Alliance & Leicester Premier Direct Current Account, which charges 5.9% EAR on unauthorised overdrafts (and 0% EAR on authorised overdrafts of up to £2,500 in the first year).

The Bad: rates of 10% to 20% EAR

Alas, there are only three banks (and five accounts) in this second category. None of them deserves a medal in my book, but Northern Bank (NI) deserves a nod for charging the lowest unauthorised overdraft rates of the four major Northern Irish banks.

The Ugly: rates of 20% to 30% EAR

Brace yourself, because your current account is very likely to be listed in the next table, as it has 32 entries!

To be blunt, there can be no award-winners in this category.

One trend that stands out is: the bigger the bank, the higher the unauthorised overdraft rates charged. Abbey, Barclays, Halifax, Lloyds TSB, NatWest and Royal Bank of Scotland-- the giants of British banking -- all feel it necessary to charge rates of 27.5% to 30% a year to customers who dip into the red. Meanwhile, the little Cumberland BS (with just 33 branches) feels it can make money by charging 20.73% AER. I think the great overdraft rip-off is becoming clearer by the minute!

The Hideous: rates over 30% EAR

Normally, I divide financial products into three categories, but today we have a fourth, which includes five truly horrible accounts:

I've singled out the Northern Irish banks for criticism in the past and, despite an investigation by the Competition Commission, people in the Six Counties are still being robbed by their banks. The interest rates on these five accounts are nothing short of usurious and approach those charged by loan sharks and other financial predators. Ulster Bank and Bank of Ireland (GB) should be thoroughly ashamed of themselves!

So, under which category did your current account fall? Did your unauthorised overdraft rate come as a surprise? Regardless of which account you have, it makes sense not to go overdrawn without permission. Otherwise, you could well end up paying ridiculous rates of interest and monstrous penalty charges, so contact your bank as soon as you think you might slip into the red. It will save you a pretty penny!

Postscript: Accounts not reviewed in this article

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